6K

Statement of Cash Flows	Three Months Ended June 30					Six Months Ended June 30
	2006			2005		2006			2005
	(in thousands)
Operating activities	$	(274	)	$	509	$	(316	)	$	633
Investing activities - Proceeds from disposition of discontinued operations		2,643			-		2,643			-
Financing activities		-			-		-			-
Cash from discontinued operations	$	2,369		$	509	$	2,327		$	633

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

For the Three and Six Month Periods Ended June 30, 2006 and 2005

(in Canadian dollars)

CAPITAL ASSETS

	June 30, 2006						December 31, 2005
							(Restated - note 3)
	Cost		Accumulated Amortization		Net Book Value		Cost		Accumulated Amortization		Net Book Value
	(in thousands)
Computer hardware	$	2,411	$	2,391	$	20	$	2,407	$	2,385	$	22
Computer software		13		13		-		13		11		2
Furniture and fixtures		266		266		-		266		266		0
Leasehold improvements		27		9		18		27		6		21
	$	2,717	$	2,679	$	38	$	2,713	$	2,668	$	45

DUE TO RELATED PARTIES

During the quarter ended June 30, 2006, the Company repaid advances from directors and/or officers totaling $22,000. During the quarter ended March 31, 2006, the Company repaid $45,000 through the issuance of Series J notes. The total advances outstanding at June 30, 2006 include $61,000 comprised of two loan agreements that pay interest at a rate of 12 percent per annum, are secured by a general security agreement on the assets of the Company and mature as follows:

•

$44,000 maturing on July 29, 2006, and

•

$17,000 maturing on August 15, 2006.

The remaining amount of $9,000 is interest free and has no specific terms of repayment.

As at June 30, 2006, accrued liabilities included $8,000 (December 31, 2005 - $5,000) in interest payable on the above amounts due to related parties.

During the quarter ended June 30, 2006, interest expense on advances from related parties was $2,000 (June 30, 2005 - $nil).

During the six months ended June 30, 2006, interest expense on advances from related parties was $4,000 (June 30, 2005 - $nil).

During the quarter ended June 30, 2006, the Company accrued $25,000 in advisory fees to a related party in connection with the sale of ADB Systemer (Note 3).

SECURED SUBORDINATED NOTES

a) During the quarter ended March 31, 2006, the Company issued Series J secured subordinated notes with a face value of $755,000. The Series J notes were issued to private investors including an amount totaling $105,000 issued to three directors/officers of the Company. The Series J notes mature February 8, 2011, have an annual interest rate of 11 percent and are convertible into equity units at a price of $0.15 per unit. Interest for the first year is payable in shares of the Company with the provision that the total number of shares issued as interest payment cannot exceed 6,529,959 shares. Interest payable for the remaining term of the notes is payable in cash upon the earlier of maturity and conversion. Each equity unit consists of one

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

For the Three and Six Month Periods Ended June 30, 2006 and 2005

(in Canadian dollars)

common share and one share-purchase warrant with an exercise price of $0.20 per warrant. The warrants expire on the earlier of (i) February 8, 2009 and (ii) the date which is sixty days following the issuance of a notice by the Company to holders confirming that the closing price of the Company’s common shares, on the Toronto Stock Exchange, was greater than or equal to $0.35 for any 10 consecutive trading days. The afore-mentioned conversion provisions are subject to a four month and one day holding period. The Series J notes are secured by a general security agreement on the assets of the Company, subordinated to the security claims provided to the holders of previously issued notes.

As required by Canadian GAAP, the Company separated the liability and equity components of the Series J secured subordinated notes. The Company determined the fair value of the liability component of the Series J notes by calculating the present value of the associated cash flows, using a discount rate that reflects the Company’s underlying rate of borrowing. The Company determined the fair value of the conversion feature at the issue date of the Series J notes using the Cox-Rubinstein binomial valuation model. The resulting pro rata fair values of the liability component of the notes and the conversion features of the units, comprised of shares and attached warrants, was $202,000, $353,000 and $200,000, respectively. The liability component will be accreted to $755,000 over the term of the Series J notes through the recording of a non-cash interest expense until such date at which the underlying notes are converted into common shares.

During the quarter ended June 30, 2006, $300,000 (face value) of the Series J notes (book value of $95,000) were converted into 2,000,000 equity units represented by 2,000,000 common shares valued at $140,000 and 2,000,000 warrants valued at $80,000 (See table below).

b) During the quarter ended September 30, 2005, the Company issued Series I secured subordinated notes with a face value of $1,200,000. The Series I notes were issued to private investors including an amount totaling $110,000 issued to four directors/officers of the Company. The Series I notes mature September 12, 2010, have an annual interest rate of 11 percent and are convertible into equity units at a price of $0.15 per unit. Interest for the first year is payable in shares with the provision that the total number of shares issued as interest payment cannot exceed 974,000 shares. Any of the first year interest not paid through the issuance of shares will be paid in cash. Interest payable for the remaining term of the notes is payable in cash upon the earlier of maturity and conversion. Each equity unit consists of one common share and one share-purchase warrant with an exercise price of $0.20 per warrant. The warrants expire on September 12, 2010. The Series I notes are secured by a general security agreement on the assets of the Company, subordinated to the security claims provided to the holders of previously issued notes.

As required by Canadian GAAP, the Company separated the liability and equity components of the Series I secured subordinated notes. The Company determined the fair value of the liability component of the Series I notes by calculating the present value of the associated cash flows, using a discount rate that reflects the Company’s underlying rate of borrowing. The Company determined the fair value of the conversion feature at the issue date of the Series I notes using the Cox-Rubinstein binomial valuation model. The resulting pro rata fair values of the liability component of the notes and the conversion features of the units, comprised of shares and attached warrants, was $280,000, $472,000 and $448,000, respectively. The liability component will be accreted to $1,200,000 over the term of the Series I notes through the recording of a non-cash interest expense until such date at which the underlying notes are converted into common shares.

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

For the Three and Six Month Periods Ended June 30, 2006 and 2005

(in Canadian dollars)

Cash financing costs in the amount of $137,000 were incurred in the issuance of the Series I notes. A portion of these financing costs, in the amount of $32,000, attributed to the liability component of the notes was allocated to deferred charges. The remaining financing costs of $105,000 attributed to the equity portions of the notes were recorded as a reduction to the conversion feature on secured subordinated notes amount within shareholders’ deficiency.

In addition to the financing costs described above, the Company issued to the financing agent, PowerOne Capital Markets Limited (“PowerOne”), an option to purchase up to 747,000 equity units at a purchase price of $0.15 per unit. The option expires on September 12, 2010. Each equity unit consists of one common share and one share-purchase warrant with an exercise price of $0.20 per warrant. The share-purchase warrants expire on September 12, 2010. Using the Cox-Rubinstein binomial valuation model, the Company has determined the fair value of these equity units to be $193,000 and included this amount in other options. The portion of the fair value of this option, in the amount of $45,000, attributable to the liability component of the notes was allocated to deferred charges. The remaining portion, in the amount of $148,000, attributable to the equity components of the notes was recorded as a reduction to the conversion feature on secured subordinated notes amount within shareholders’ deficiency.

During the quarter ended March 31, 2006, $75,000 (face value) of the Series I notes (book value of $22,000) were converted into 500,000 equity units represented by 500,000 common shares valued at $22,000 and 500,000 warrants valued at $20,000 (See table below).

During the quarter ended June 30, 2006, $825,000 (face value) of the Series I notes (book value of $269,000) were converted into 5,500,000 equity units represented by 5,500,000 common shares valued at $235,000 and 5,500,000 warrants valued at $223,000 (See table below).

c) During the year ended December 31, 2004, the Company issued Series H secured subordinated notes with a face value of $520,000. The Series H notes were issued to private investors including an amount totaling $270,000 issued to directors of the Company. The Series H notes mature October 21, 2007, have an annual rate of interest of 11 percent payable upon the earlier of maturity and conversion and are convertible into equity units at a price of $0.20 per unit. Each equity unit consists of one common share and one half of a share-purchase warrant with an exercise price of $0.40 per warrant. The share-purchase warrants expire on October 21, 2008. The Series H secured subordinated notes will automatically convert into units when the share price of the Company closes at or above $0.45 for 10 consecutive trading days during the term. Holders may convert the notes into units at anytime following a four-month hold period. If the holder does not convert and no automatic conversion takes place, the Company must repay the principal amount in cash. In order to obtain the required approvals to issue the Series H notes, the Company retroactively increased the interest rate on the Series G notes from an annual rate of 7 percent to an annual rate of 11 percent. The Series H notes are secured by a general security agreement on the assets of the Company, subordinated to the security claims provided to the holders of previously issued notes.

As required by Canadian GAAP, the Company separated the liability and equity components of the Series H secured subordinated notes. The Company determined the fair value of the liability component of the Series H notes by calculating the present value of the associated cash flows, using a discount rate that reflects the Company’s underlying rate of borrowing. The Company determined the fair value of the conversion feature at the issue date of the Series H notes using the Cox-Rubinstein binomial valuation model. The resulting pro rata fair values of the liability component of the notes and the conversion features of the units, comprised of shares and attached warrants, was $282,000, $184,000 and $54,000, respectively. The liability component will be accreted to $520,000 over the term of the Series H notes through the recording of a non-cash interest expense until such date at which the underlying notes are converted into common shares.

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

For the Three and Six Month Periods Ended June 30, 2006 and 2005

(in Canadian dollars)

Financing costs in the amount of $43,000 were incurred in the issuance of the Series H notes. Included in the financing costs was the incremental interest expense associated with the retroactive increase of the interest rate on the Series G notes. Financing costs of $23,000 attributed to the liability component of the notes were allocated to deferred charges. Financing costs of $20,000 attributed to the equity portions of the notes were recorded as a reduction to the conversion feature on secured subordinated notes amount within shareholders’ deficiency.

d) During the quarter ended June 30, 2004, the Company issued Series G secured subordinated notes with a face value of $1,710,000. The Series G notes were issued to private investors including an amount totaling $170,000 issued to directors of the Company. The Series G notes mature June 15, 2007, have an annual rate of interest of 7 percent payable upon the earlier of maturity and conversion and are convertible into equity units at a price of $0.31 per unit. Each equity unit consists of one common share and one half of a share-purchase warrant with an exercise price of $0.50 per warrant. The share-purchase warrants expire on June 15, 2008. The Series G secured subordinated notes will automatically convert into units when the volume-weighted average share price of the Company closes above $0.70 for 20 consecutive trading days during the term. Holders may convert the notes into units at anytime following a four-month hold period. If the holder does not convert and no automatic conversion takes place, the Company must repay the principal amount in cash. The Series G notes are secured by a general security agreement on the assets of the Company, subordinated to the security claims provided to the holders of previously issued notes.

As required by Canadian GAAP, the Company separated the liability and equity components of the Series G secured subordinated notes. The Company determined the fair value of the liability component of the Series G notes by calculating the present value of the associated cash flows, using a discount rate that reflects the Company’s underlying rate of borrowing. The Company determined the fair value of the conversion feature at the issue date of the Series G notes using the Cox-Rubinstein binomial valuation model. The resulting pro rata fair values of the liability component of the notes and the conversion features of the units, comprised of shares and attached warrants, was $959,000, $539,000 and $212,000, respectively. The liability component will be accreted to $1,710,000 over the term of the Series G notes through the recording of a non-cash interest expense until such date at which the underlying notes are converted into common shares.

Financing costs in the amount of $230,000 were incurred in the issuance of the Series G notes. Financing costs of $129,000 attributed to the liability component of the notes were allocated to deferred charges. Financing costs of $101,000 attributed to the equity portions of the notes were recorded as a reduction to the conversion feature on secured subordinated notes amount within shareholders’ deficiency.

In addition to the financing costs described above, the Company issued to First Associates Investment Inc. (“First Associates”) an option to purchase up to 485,000 equity units at a purchase price of $0.31 per unit. The option expired on June 15, 2006. Each equity unit consists of one common share and one half of a share-purchase warrant with an exercise price of $0.50 per warrant. The share-purchase warrants expire on June 15, 2008. Using the Cox-Rubinstein binomial valuation model, the Company has determined the fair value of these equity units to be $59,000. The portion of the fair value of these options, in the amount of $33,000, attributable to the liability component of the notes was allocated to deferred charges. The remaining portion, in the amount of $26,000, attributable to the equity components of the notes was recorded as a reduction to the conversion feature on secured subordinated notes amount within shareholders’ deficiency.

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

For the Three and Six Month Periods Ended June 30, 2006 and 2005

(in Canadian dollars)

Subsequent to the issuance of the Series G notes, the interest rate payable on the notes was retroactively increased to 11 percent. The increase in the interest rate was a condition of the issuance of the Series H notes (See (c) above).

During the quarter ended June 30, 2006, $60,000 (face value) of the Series G notes (book value of $51,000) was repaid. Accordingly, 194,000 equity units represented by 194,000 common shares valued at $16,000 and 96,000 warrants valued at $6,000 were canceled (See table below).

e) During the quarter ended June 30, 2004, the Company issued Series F secured subordinated notes with a face value of $500,000. The Series F notes had an annual rate of interest of 7 percent paid quarterly in arrears, matured May 19, 2007 and were convertible into equity units at a price of $0.31 per unit. Each equity unit consisted of one common share and one half of a share-purchase warrant with an exercise price of $0.50 per warrant. The share-purchase warrants expire on May 19, 2007. The Series F secured subordinated notes would have automatically converted into units when the share price of the Company closed above $0.70 for five consecutive trading days during the term. Holders could convert the notes into units at anytime following a four-month hold period. If the holder did not convert and no automatic conversion took place, the Company would have repaid the principal amount in cash upon maturity. The Series F notes were secured by a general security agreement on the assets of the Company, subordinated to the security claims provided to the holders of previously issued notes.

During 2004, all of the Series F notes were converted into equity units.

As required by Canadian GAAP, the Company separated the liability and equity components of the Series F secured subordinated notes. The Company determined the fair value of the liability component of the Series F notes by calculating the present value of the associated cash flows, using a discount rate that reflects the Company’s underlying rate of borrowing. The Company determined the fair value of the conversion feature at the issue date of the Series F notes using the Cox-Rubinstein binomial valuation model. The resulting pro rata fair values of the liability component of the notes and the conversion features of the units, comprised of shares and attached warrants, was $286,000, $159,000 and $55,000, respectively. The liability component would have been accreted to $500,000 over the term of the Series F notes through the recording of a non-cash interest expense until such date at which the underlying notes were converted into common shares.

Financing costs in the amount of $26,000 were incurred in the issuance of the Series F notes. Financing costs of $15,000 attributed to the liability component of the notes were allocated to deferred charges. Financing costs of $11,000 attributed to the equity portions of the notes were recorded as a reduction to the conversion feature on secured subordinated notes amount within shareholders’ deficiency.

f) During the quarter ended June 30, 2006, the Company recorded cash interest expense of $93,000 (June 30, 2005 - $70,000) and interest accretion of $123,000 (June 30, 2005 - $91,000).

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

For the Three and Six Month Periods Ended June 30, 2006 and 2005

(in Canadian dollars)

During the six months ended June 30, 2006, the Company recorded cash interest expense of $200,000 (June 30, 2005 - $141,000) and interest accretion of $268,000 (June 30, 2005 - $186,000).

g) As at June 30, 2006, accrued liabilities include $458,000 (December 31, 2005 - $363,000) of unpaid interest payable relating to the secured subordinated notes.

h) Accrued liabilities include accrued interest payable to related parties as follows:

(In thousands of dollars)	June 30, 2006		December 31, 2005
Series E	$	1	$	1
Series G		25		29
Series H		3		1
Series I		10		3
Series J		4		-
Total	$	43	$	34

i) Interest payments relating to the secured subordinated notes totaling $1,000 were made to related parties in the three month period ended June 30, 2006 (June 30, 2005 - $1,000).

Interest payments relating to the secured subordinated notes totaling $2,000 were made to related parties in the six months ended June 30, 2006 (June 30, 2005 - $2,000).

j) The following summarizes the face and fair values of the liability and the equity components of the secured subordinated notes.

Secured subordinated notes	Six Months Ended June 30, 2006						Year Ended December 31, 2005
	Face Value			Fair Value			Face Value			Fair Value
	(in thousands)
Opening balance	$	3,455		$	2,143		$	2,605		$	1,684
Issuance of notes:
Series I		-			-			1,200			280
Series J		755			202			-			-
Accreted (non-cash) interest		-			270			-			405
Conversion of notes:
Series G (Note 6 (d))		(60	)		(51	)		-			-
Series H		-			-			(350	)		(226	)
Series I (Note 6 (b))		(900	)		(291	)		-			-
Series J (Note 6 (a))		(300	)		(95	)		-			-
Closing balance	$	2,950		$	2,177		$	3,455		$	2,143

Current portion of notes - Series E and G	$	2,025		$	1,786		$	375		$	343
Long-term portion of notes		925			391			3,080			1,800
	$	2,950		$	2,177		$	3,455		$	2,143

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

For the Three and Six Month Periods Ended June 30, 2006 and 2005

(in Canadian dollars)

Conversion features on secured subordinated notes including conversion feature of attached warrants	Six Months Ended June 30, 2006						Year Ended December 31, 2005
	Common Shares			Fair Value			Common Shares			Fair Value
	(in thousands)
Opening balance		27,156		$	1,513			13,781		$	992
Issuance of notes:
Series I		-			-			16,000			668
Series J		10,067			553			-			-
Conversion of notes:
Series G (Note 6 (d))		(290	)		(22	)		-			-
Series H		-			-			(2,625	)		(147	)
Series I (Note 6 (b))		(12,000	)		(500	)		-			-
Series J (Note 6(a))		(4,000	)		(220	)		-			-
Closing balance		20,933		$	1,324			27,156		$	1,513

SHARE CAPITAL

a) Authorized

Unlimited number of common shares

Unlimited number of preference shares - issuable in series

b) Outstanding

Common Shares	Six Months Ended June 30, 2006				Year Ended December 31, 2005
	Shares		Amount		Shares		Amount
	(in thousands of shares and dollars)
Opening balance		74,120	$	100,859		69,870	$	100,052

Shares issued pursuant to:
Private placement (Note 7 (c))		-		-		2,500		468
Conversion of debentures (Note 6)		8,000		782		1,750		339
Payment of interest (Note 7 (d))		425		72		-		-
Closing balance		82,545	$	101,713		74,120	$	100,859

c) Private Placement

On February 23, 2005, the Company completed a transaction resulting in the issuance of 2.5 million common shares at a price of $0.23 per share and 1.25 million share-purchase warrants, exercisable into one common share at a price of $0.40, for gross proceeds of $575,000 and net proceeds of $570,000. Net proceeds of $444,000 were allocated to the common shares and the balance of $126,000 to warrants. The warrants expire on February 23, 2009.

A reduction to the financing costs related to a private share placement in December 2004, resulted in a $24,000 increase to the amount of share capital in the third quarter of 2005.

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

For the Three and Six Month Periods Ended June 30, 2006 and 2005

(in Canadian dollars)

d) Payment of Interest

Upon conversion of Series I notes, accrued interest in the amount of $60,000 was settled through the issuance of 361,000 common shares.

Upon conversion of Series J notes, accrued interest in the amount of $12,000 was settled through the issuance of 64,000 common shares.

CONTRIBUTED SURPLUS

The following table summarizes the transactions within contributed surplus.

(In thousands of dollars)	June 30, 2006			December 31, 2005
Opening balance	$	1,555		$	1,282

Allocation of unamortized deferred charges upon conversion of secured subordinated notes		(51	)		(13	)
Allocation of recorded value of expired warrants		-			286
Allocation of recorded value of expired options		59			-
Repayment of secured subordinated notes (a)		20			-
Closing balance	$	1,583		$	1,555

During the quarter ended June 30, 2006, the Company repaid Series G notes totaling $60,000 (See Note 6 (d)). As a result, conversion features valued at $22,000, partially offset by unamortized deferred charges valued at $2,000, were allocated to contributed surplus.

WARRANTS

a) A summary of the changes in the warrants issued and outstanding is as follows:

	June 30, 2006				December 31, 2005
	Number		Amount		Number			Amount
	(in thousands of shares and dollars)
Opening balance		8,854	$	278		11,512		$	405

Warrants issued pursuant to:
Private placement (Note 7 (c))		-		-		1,250			126
Conversion of debentures (Series J - Note 6 (a), Series I - Note 6 (b), Series H - Note 9 (c))		8,000		323		875			33
Warrants cancelled (Note 9 (b))		-		-		(4,783	)		(286	)
Closing balance		16,854	$	601		8,854		$	278

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

For the Three and Six Month Periods Ended June 30, 2006 and 2005

(in Canadian dollars)

b) On December 13, 2002, the Company issued 2 million warrants, with an exercise price of $0.45 per warrant, to a key customer as part of a strategic marketing agreement. These warrants, of which 1.25 million had vested, expired on January 5, 2005. Accordingly, these warrants were cancelled.

On April 25, 2002, the Company issued 50,000 warrants, with an exercise price of $US 0.35 per warrant, as partial consideration for funding and due diligence services. These warrants expired on April 25, 2005, and were accordingly cancelled.

On June 13, 2005, the Company extended the expiry date of the 2,733,000 warrants, with an exercise price of $0.40 per warrant, that were issued on June 26, 2003. The original expiry date of June 26, 2005 was extended to September 26, 2005. These warrants expired unexercised on September 26, 2005 and, as a result, were cancelled.

c) During 2005, the Company issued a total of 875,000 common share-purchase warrants with an exercise price of $0.40 and an expiry date of October 21, 2008, as the result of the conversion of Series H notes.

10.

STOCK OPTIONS

As at June 30, 2006, 2.87 million stock options were outstanding to employees and directors of which 2.12 million were exercisable. As at December 31, 2005, 2.99 million stock options were outstanding to employees and directors, of which 1.49 million were exercisable.

On January 25, 2005, the Company granted 1.5 million stock options to employees, officers and directors. The options have an exercise price of $0.22 and expire on January 25, 2010. The options are comprised of two categories: non-performance based options and performance based options. The non-performance based options account for 1,361,000 of the options granted. Approximately 182,000 of these options vested in the second quarter of 2006 (Q2 of 2005 - 227,000), representing the final vesting period of these non-performance based options. The remaining 139,000 performance-based options were granted to certain Company officers and will vest upon the achievement of specific Company performance objectives. None of the performance-based options have vested as at June 30, 2006.

On December 22, 2005, the Company granted 1 million stock options to certain employees, officers and directors of the Company. The options have an exercise price of $0.16 and expire on December 22, 2008. The options are comprised of two categories: non-performance based options and performance based options. The non-performance based options account for 500,000 of the options granted. Of these options, 400,000 vest quarterly over a four-quarter period and 100,000 were cancelled in the quarter ended March 31, 2006. During the second quarter of 2006, an additional 100,000 of the non-performance options vested. The remaining 500,000 performance-based options were granted to an officer and director of the Company and will vest upon the achievement of specific Company performance objectives. During the second quarter of 2006, none of these performance-based options vested.

On June 21, 2006, the Company granted 50,000 stock options to certain employees of the Company. The options have an exercise price of $0.15 and expire on June 21, 2011. Approximately 6,000 of these options vested in the second quarter of 2006, with the same number of options to be vest in the subsequent quarters.

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

For the Three and Six Month Periods Ended June 30, 2006 and 2005

(in Canadian dollars)

The Company records a compensation expense for stock options granted to employees and directors based on the fair value method of accounting. For the three month periods ended June 30, 2006 and June 30, 2005, the employee stock option expense was $37,000 and $16,000, respectively. For the six month periods ended June 30, 2006 and June 30, 2005, the employee stock option expense was $72,000 and $32,000, respectively.

The Company determined the fair value of employee stock option grants using the Cox-Rubinstein binomial valuation model with the following assumptions on a weighted average basis:

	Three and Six Months Ended June 30
	2006			2005
Dividend yield		-			-
Risk free interest rate		4.42	%		3.86	%
Expected volatility		88.11	%		96.60	%
Expected term, in years		5.00			4.83

11.

OTHER INCOME

During the quarter ended March 31, 2005, the Company received non-recurring proceeds in the amount of $42,000, related to on-line retail activities that had been carried out prior to October 2000.

12.

SEGMENTED INFORMATION

The Company operates in a single reportable operating segment, that is, the design and delivery of software solutions for use by its customers. The single reportable operating segment derives its revenues from the sale of software licenses and related services. Sales for each regional segment are based on the location of 3^rd party customer.

The Company operates in several reportable geographic segments: North America, Ireland and the United Kingdom. Information about the Company’s geographical net revenues and long-term assets is set forth below:

Long-term Assets by Geographic Regions:	June 30, 2006				December 31, 2005
	Capital Assets		Other Assets		Capital Assets		Other Assets
					(Restated - note 3)
	(in thousands)
North America	$	36	$	70	$	42	$	156
Ireland and U.K.		2		-		3		-
Assets from discontinued operations (Note 3)		-		-		56		-
	$	38	$	70	$	101	$	156

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

For the Three and Six Month Periods Ended June 30, 2006 and 2005

(in Canadian dollars)

Net Revenue by Geographic Regions:	Three Months Ended June 30				Six Months Ended June 30
	2006		2005		2006		2005
			(Restated - note 3)				(Restated - note 3)
	(in thousands)				(in thousands)
North America	$	97	$	114	$	268	$	322
Ireland and U.K.		73		130		274		192
Revenue from discontinued operations (Note 3)		1,049		1,046		2,398		2,312
	$	1,219	$	1,290	$	2,940	$	2,826

Three customers accounted for 63% (2005 - 80%) of revenues for the quarter ended June 30, 2006 and 77% (December 31, 2005 - 73%) of trade receivables as at June 30, 2006.

13.

CHANGES IN NON-CASH OPERATING WORKING CAPITAL

The following table sets forth the changes in non-cash working capital items resulting from the inflow (outflow) of cash in the period.

	Three Months Ended June 30					Six Months Ended June 30
	2006		2005			2006			2005
			(Restated - note 3)						(Restated - note 3)
	(in thousands)					(in thousands)
Accounts receivable	$	9	$	49		$	37		$	226
Deposits and prepaid expenses		8		(127	)		38			(45	)
Accounts payable		64		193			(59	)		226
Accrued liabilities		71		(30	)		84			(74	)
Deferred revenue		40		36			105			58
	$	192	$	121		$	205		$	391

The following table summarizes the non-cash financing activities of the Company.

	Three Months Ended June 30				Six Months Ended June 30
	2006		2005		2006			2005
	(in thousands)				(in thousands)
Issuance of common shares in settlement of interest payments (Note 7 (d))	$	68	$	-	$	72		$	-
Reduction in advances from related parties from conversion of secured subordinated notes (Note 5)		-		-		(45	)		-

MANAGEMENT’S DISCUSSION AND ANALYSIS

Dated: August 10, 2006

OVERVIEW

Northcore Technologies Inc., formerly ADB Systems International Ltd. (“Northcore” or the “Company”) provides core asset solutions that help organizations source, manage and sell their capital equipment. Northcore works with a growing number of customers and partners in a variety of industry verticals including government, healthcare, manufacturing, financial services, and oil and gas.

Our integrated solutions are designed to help our customers get full value from their capital assets by helping to:

•

Streamline sourcing/procurement activities while reducing purchasing costs;

•

Schedule preventative and corrective maintenance activities, eliminating unnecessary operational downtimes and reducing maintenance costs;

•

Manage inventory of materials more effectively, resulting in reduced purchase costs, improved access to supplies, and easier tracking of assets regardless of their location;

•

Generate higher yield for surplus assets that are disposed or sold on-line;

Current customers and partners include GE Commercial Finance, Commercial Equipment Financing (“GE CEF”), Halliburton Energy Resources, Paramount Resources and Trilogy Energy Trust.

Through our wholly owned subsidiary, ADB Systems USA, Inc., Northcore owns a 50 percent interest in GE Asset Manager, LLC (also referred to as “GE’s Asset Manager”), a joint venture launched with GE CEF.

The Company's shares trade on both the Toronto Stock Exchange (TSX: NTI) and the OTC Bulletin Board (OTCBB: NTLNF).

DEVELOPMENTS OF THE SECOND QUARTER OF 2006

In addition to our financial performance, Northcore completed a number of operating activities in the quarter:

–

As referenced previously, we sold our Norwegian business unit for $2.7 million in cash and debt settlement and changed our name to Northcore Technologies following shareholder approval.

–

GE Asset Manager LLC, the Company’s joint venture, provided web-based asset tracking capabilities to a number of GE Infrastructure businesses, including Aviation, Energy, Oil and Gas, Rail and Water.

–

The Company’s joint venture with GE launched Asset Appraiser, a web-based tool that automates appraisal activities and ensures compliance with industry standards.

–

Northcore signed strategic alliance agreements with VT Software solutions, a UK-based provider of fleet management solutions, and Donna Cona, an Ottawa-based provider of systems integration and technology consulting services.

–

Effective, July 18, Northcore began to trade on the TSX under the symbol NTI and as NTLNF on the over-the-counter market (OTCBB).

MANAGEMENT’S DISCUSSION AND ANALYSIS

Dated: August 10, 2006

Information Regarding Forward-looking Statements

Statements contained in this report may include comments that do not refer strictly to historical results or actions and may be deemed to be forward-looking within the meaning of the Safe Harbor provisions of the U.S. federal securities laws. These risks include, among others, statements about expectations of future revenues, cash flows, and cash requirements. Forward-looking statements are subject to risks and uncertainties that may cause our results to differ materially from expectations.

These risks include:

•

our ability to raise additional funding if needed;

•

our ability to repay our debt to lenders;

•

volatility of the stock markets and fluctuations in the market price of our stock;

•

risks associated with international operations;

•

our ability to develop appropriate strategic alliances and successfully develop and implement technology;

•

our ability to gain acceptance of our products and services;

•

our ability to respond to competitive factors and technological changes;

•

our ability to introduce new technology offerings and services;

Other such risks as we may identify and discuss from time to time, including those risks disclosed in the Company’s Form 20-F filed with the Securities and Exchange Commission, Annual Information Form, and Management Information Circular, may also cause our results to differ materially from expectations. Additional information relating to the Company, including the Annual Information Form, is available on SEDAR at www.sedar.com.

We encourage you to carefully review these risks, as outlined, to evaluate your existing or potential investment in our securities.

RESULTS OF CONTINUING OPERATIONS

Comparison of the Quarters Ended June 30, 2006 and June 30, 2005

The following commentary compares the unaudited consolidated financial results for the three month periods ended June 30, 2006 and June 30, 2005 and analyzes significant changes in the consolidated statements of operations and consolidated statements of cash flows.

Overview: The loss from continuing operations for the second quarter of 2006 was $875,000, a loss of $0.01 per share, compared to a loss from continuing operations of $1.12 million, a loss of $0.02 per share for the same quarter of 2005. The improvement in loss from continuing operations for the quarter was mainly due to lower operating expenses for the second quarter of 2006, which declined from $1.21 million to $0.83 million, a decrease of $371,000 or 31 percent when compared to the same period last year.

Revenue: Revenue is comprised of software license sales, service fees for software implementation, application hosting, support and training. Overall revenue decreased by $74,000 to $170,000 for the quarter ended June 30, 2006 from $244,000 for the quarter ended June 30, 2005. The decline was the result of revenue decreases of $17,000 and $57,000 in the North American and Ireland/UK regions, respectively. The decline in the North American region was attributable to reduced hosting revenue. The decline in the Ireland/U.K. revenue resulted primarily from reduced implementation and hosting revenue.

MANAGEMENT’S DISCUSSION AND ANALYSIS

Dated: August 10, 2006

General and Administrative Expenses: General and administrative expenses decreased by $343,000 from $841,000 for the quarter ended June 30, 2005 compared to $498,000 for the quarter ended June 30, 2006, a decrease of 41 percent. Major savings over the same period last year include reduction in staffing in Ireland and North America, lower rent and occupancy costs due to office relocations and a North American rebate of utility and property taxes, lower professional fees and investor relations expenses due to reduced reliance on outside contractors, and a lower provision for doubtful accounts receivable.

Customer Service and Technology Expenses: Customer service and technology costs include all salaries and related expenses associated with the provision of implementation, consulting, application hosting, support and training services. For the quarter ended June 30, 2006 these costs amounted to $159,000 compared with $200,000 for the second quarter of 2005, a decrease of $41,000 or 21 percent. The decrease in costs is due primarily to the decrease in staffing levels in Ireland.

Sales and Marketing Expenses: Sales and marketing costs include all salaries and related expenses for our sales and marketing personnel as well as business development expenses such as advertising, sales support materials, and trade show costs. For the quarter ended June 30, 2006 sales and marketing costs amounted to $120,000, as compared to $127,000 in the same period of 2005, a slight decline of $7,000 or 6 percent.

Employee Stock Options: The 2006 employee stock option expense represents the fair value of the stock options vesting from the June 21, 2006, December 22, 2005 and January 25, 2005 grants of 50,000, 1 million and 1.5 million stock options respectively. For the quarter ended June 30, 2006, employee stock option expense amounted to $37,000, as compared to $16,000 in the same period of 2005, an increase of $21,000. This increase was due to the expenses associated with the above noted option grants.

Depreciation and Amortization: Depreciation and amortization expense was $20,000 for the quarter ended June 30, 2006 as compared to $23,000 for the quarter ended June 30, 2005.

Interest Expense: Interest expense was $216,000 for the quarter ended June 30, 2006, compared to $161,000 for the same quarter of 2005. The interest expense for 2006 included a cash interest expense of $93,000 and a non-cash interest expense of $123,000 related to the Series E, G, H, I and J secured subordinated notes. The interest expense for 2005 included a cash interest expense of $70,000 and a non-cash interest expense of $91,000 related to the Series E, G and H secured subordinated notes.

Cash Flows from Operating Activities: Operating activities resulted in cash outflows of $503,000 for the second quarter of 2006 as compared to cash outflows of $873,000 from operating activities in the second quarter of 2005. The lower cash outflow number for the second quarter of 2006 is primarily the result of lower operating expenses.

Cash Flows from Investing Activities: Investing activities produced cash outflows of $5,000 for the three month period ended June 30, 2006 as compared to outflows of $16,000 for the same period of 2005. Cash flows from investing activities were the result of acquisition of new capital assets during both quarters.

Cash Flows from Financing Activities: In the second quarter of 2006, financing activities created a cash outflow of $82,000 resulting from the repayment of secured subordinated notes with a face value of $60,000 and the repayment of $22,000 in advances from a related parties.

MANAGEMENT’S DISCUSSION AND ANALYSIS

Dated: August 10, 2006

Summary of Quarterly Results

The following table sets forth certain unaudited consolidated statements of operations data for each of the eight most recent quarters that, in management’s opinion, have been prepared on a basis consistent with the unaudited consolidated financial statements contained elsewhere in this interim report and include all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of the information presented. These operating results are not necessarily indicative of results for any future period. You should not rely on them to predict future performance. These results have been restated as a result of the disposal of ADB Systemer in June 2006. See Note 3 to the interim consolidated financial statements.

Quarter ended	June 30 2006			Mar 31 2006			Dec 31 2005			Sep 30 2005			June 30 2005			Mar 31 2005			Dec 31 2004			Sep 30 2004
(In thousands of Canadian dollars, except per share amounts)
Revenue	$	170		$	372		$	510		$	261		$	244		$	270		$	490		$	169
Operating expenses:
General and administrative		498			443			419			592			841			707			518			817
Customer service and technology		159			165			219			205			200			214			210			227
Sales and marketing		120			137			126			122			127			131			124			119
Employee stock options		37			35			59			14			16			16			-			-
Depreciation and amortization		20			25			27			24			23			21			45			44
Losses on disposal of capital assets		-			-			2			-			(2	)		-			-			-
Other income		-			-			-			-			-			(42	)		-			-
Total operating expenses		834			805			852			957			1,205			1,047			897			1,207
Loss from operations		(664	)		(433	)		(342	)		(696	)		(961	)		(777	)		(407	)		(1,038	)
Interest expense:
Cash interest expense		93			107			98			73			70			71			77			52
Accretion of secured subordinated notes		123			145			128			91			91			95			92			93
Interest income		(5	)		-			-			-			-			-			-			-
		211			252			226			164			161			166			169			145
Loss from continuing operations	$	(875	)	$	(685	)	$	(568	)	$	(860	)	$	(1,122	)	$	(943	)	$	(576	)	$	(1,183	)
Income (loss) from discontinued operations		1,918			205			(218	)		60			(58	)		206			(196	)		(338	)
Net income (loss) for the period		1,043			(480	)		(786	)		(800	)		(1,180	)		(737	)		(772	)		(1,521	)
Loss Per Share From Continuing Operations - Basic and Diluted	$	(0.01	)	$	(0.01	)	$	(0.01	)	$	(0.01	)	$	(0.02	)	$	(0.01	)	$	(0.01	)	$	(0.02	)
Net Earnings (Loss) Per Share - Basic and Diluted	$	0.01		$	(0.01	)	$	(0.01	)	$	(0.01	)	$	(0.02	)	$	(0.01	)	$	(0.01	)	$	(0.02	)

MANAGEMENT’S DISCUSSION AND ANALYSIS

Dated: August 10, 2006

Comparison of the Six-Month Periods Ended June 30, 2006 and June 30, 2005

The following commentary compares the unaudited consolidated financial results for the six-month periods ended June 30, 2006 and June 30, 2005 and analyzes significant changes in the consolidated statements of operations and consolidated statements of cash flows.

Overview: The year-to-date loss from continuing operations was $1.56 million, a loss of $0.02 per share for 2006, compared to a loss of $2.06 million, or $0.03 per share for the same period of 2005. The improvement in loss from continuing operations for the six months ended June 30, 2006 was mainly due to lower operating expenses, which declined from $2.25 million to $1.64 million, a decrease of $613,000 or 27 percent when compared to the same period last year.

Revenue: Revenue is comprised of software license sales, service fees for software implementation, application hosting, support and training and transaction fees from on-line activities performed for customers. Overall revenue increased by $27,000 to $541,000 for the first half of 2006, from $514,000 the same period of 2005. This increase is attributable to the Ireland/UK region where implementation and support revenue are up by $81,000 over the same period of 2005. This increase was partially offset by a decrease in North America revenues of $54,000 due to a decline in implementation and hosting revenue.

General and Administrative Expenses: General and administrative expenses declined by $608,000 to $940,000 for the six month period ending June 30, 2006 from $1.55 million for the same period in 2005, a decrease of 39 percent. Major savings over the same period last year include reduction in staffing in Ireland and North America, lower rent and occupancy costs due to office relocations and a North American rebate of utility and property taxes, lower professional fees and investor relations expenses due to reduced reliance on outside contractors, and a lower provision for doubtful accounts receivable.

Customer Service and Technology Expenses: Customer service and technology expenses decreased by $89,000 to $325,000 for the six months ended June 30, 2006, compared to $414,000 for the same period of 2005, a decrease of 21 percent. The decrease in costs is due primarily to the decrease in staffing levels in Ireland.

Sales and Marketing Expenses: For the six month period ended June 30, 2006 sales and marketing costs amounted to $256,000, virtually unchanged from the $257,000 in the same period of 2005.

Employee Stock Options: The 2006 employee stock option expense represents the fair value of the stock options vesting from the June 21, 2006, December 22, 2005 and January 25, 2006 grants of 50,000, 1 million and 1.5 million stock options respectively. For the six months ended June 30, 2006, employee stock option expense amounted to $72,000, as compared to $32,000 in the same period of 2005, an increase of $40,000. This increase was due to the expenses associated with the June 21, 2006 and December 22, 2005 grants.

Depreciation and Amortization: Depreciation and amortization expense was $45,000 for the first half of 2006, virtually unchanged from the depreciation and amortization expense of $44,000 for the first half of 2005.

Other Income: During the six month period ended June 30, 2005, the Company received non-recurring proceeds in the amount of $42,000, related to on-line retail activities that had been carried out prior to October 2000.

MANAGEMENT’S DISCUSSION AND ANALYSIS

Dated: August 10, 2006

Interest Expense: Interest expense was $468,000 for the six months ended June 30, 2006, compared to $327,000 for the same period of 2005. The interest expense for 2006 included a cash interest expense of $200,000 and a non-cash interest expense of $268,000 related to the Series E, G, H, I and J secured subordinated notes. The interest expense for 2005 included a cash interest expense of $141,000 and a non-cash interest expense of $186,000 related to the Series E, G and H secured subordinated notes.

Cash Flows from Operating Activities: Operating activities resulted in cash outflows of $970,000 for the first half of 2006 as compared to cash outflows of $1.41 million from operating activities in the first half of 2005. The lower cash outflow number for the first half of 2006 is primarily the result of a lower operating expenses.

Cash Flows from Investing Activities: Investing activities produced cash outflows of $5,000 for the six months ended June 30, 2006 as compared to outflows of $34,000 for the same period of 2005. Cash flows from investing activities were the result of acquisition of new capital assets during both periods.

Cash Flows from Financing Activities: Financing activities generated cash inflows of $623,000 for the first half of 2006 and cash inflows of $570,000 for the first half of 2005. The 2006 cash flows were the result of proceeds in the amount of $705,000 from the issuance of the Series J convertible notes less the repayment of secured subordinated notes with a face value of $60,000 and the repayment of $22,000 in advances from a related parties. The 2005 cash inflow resulted from the issuance of common shares and common share-purchase warrants through a private placement for net proceeds of $570,000.

DISCONTINUED OPERATIONS

On May 18, 2006, the Company entered into an agreement with ADB Systemer Holding AS (the "Buyer), to sell 100 percent of the Company's interest in its Norwegian subsidiary ADB Systemer AS, (ADB Systemer") for NOK 15,000,000 or approximately Canadian $2.68 million in cash subject to shareholder approval. Certain shareholders of the Buyer were employees or executive officers of ADB Systemer and shareholders of the Company. On June 21, 2006 the Company received approval from shareholders at its annual general meeting to proceed with the sale of ADB Systemer, which closed on June 30, 2006. Sale of the shares of ADB Systemer include sale of the ADB Systems name. Following the sale of ADB Systemer, the Company will retain access to all existing technology that will be used to service existing customers. In addition, the Company obtained Shareholder approval to change its name to Northcore Technologies Inc. by filing Articles of Amendment upon closing of the sale of ADB Systemer.

Since 2001 when ADB Systemer was acquired, it was expected that ADB Systemer would complement our technology portfolio enabling us to offer customers full lifecycle asset optimization capability. Additionally, we expected ADB Systemer to be a steady performer, generating moderate profits and growth while other areas of ADB business, with larger growth and profit potential, were being developed.

Over the past two years it had been expected that North American lifecycle asset management software licensing and the joint venture with GE would begin to grow, both strategically and financially. Although financial results were slower than anticipated, on the strategic front, there is little doubt that GE based relationships forged in 2004 and 2005 were essential foundations for increased levels of deal flow and strategic activity early in 2006.

Management is now confident that this heightened level activity through our GE joint venture and emerging opportunities in the North American government and oil and gas sectors will continue through 2006 and beyond. By increasing our focus on these areas, and the sale of our share in Norway, we believe that we will be able to maximize growth potential and fund our operations through to profitability.

MANAGEMENT’S DISCUSSION AND ANALYSIS

Dated: August 10, 2006

Following the sale of ADB Systemer, the Company continues to develop its activities in the oil and gas industry in Western Canada, building on successful relationships with Paramount and Trilogy within the broader context of this sector’s strong economic growth. Recent Calgary-based seminars and meetings have yielded new opportunities among potential clients who are interested in our materials transfer technology. New opportunities have also emerged for the company in the North American government sectors. Other organizations around the world remain customers using our maintenance software and have been targeted for possible technology upgrades. We continue to have access to all ADB software through long-term agreements.

In the UK, when new business is generated by ADB Systemer, we will receive a 10 percent revenue share for four years. We believe this to be an appropriate way to ensure the equivalent of a “bottom line” from clients such as the NHS and Star Energy without overhead or risk.

Most notably, we expect to benefit from an increased focus on GE’s Asset Manager, the joint venture we established with GE in 2004. Many client relationships and strategic developments related to the joint venture have now progressed to the stage where we feel that by devoting further management attention to these opportunities we will see greater growth and profit potential than would be the case if we had retained ownership of the Norway business. With the cash compensation received from the sale, we expect the company to be well funded operationally without further dilution to our shareholders.

The following summarizes the balance sheet, statement of operations and statement of cash flows information for the Company’s discontinued operations.

Balance Sheet	June 30, 2006		December 31, 2005
	(In thousands of Canadian dollars)
Current assets	$	-	$	1,114
Long-term assets		-		56
Current liabilities		-		(894	)
Net assets from discontinued operations	$	-	$	276

Income Statement	Three Months Ended June 30					Six Months Ended June 30
	2006		2005			2006		2005
	(in thousands of Canadian dollars, except per share amounts)
Revenue	$	1,049	$	1,047		$	2,399	$	2,313
Income from operations		126		(58	)		331		148
Gain from disposition of discontinued operations		1,792		-			1,792		-
Income from discontinued operations	$	1,918	$	(58	)	$	2,123	$	148
Income per share from discontinued operations, basic and diluted	$	0.02	$	-		$	0 .03	$	-

MANAGEMENT’S DISCUSSION AND ANALYSIS

Dated: August 10, 2006

Statement of Cash Flows	Three Months Ended June 30					Six Months Ended June 30
	2006			2005		2006			2005
	(In thousands of Canadian dollars)
Operating activities	$	(274	)	$	509	$	(316	)	$	633
Investing activities - Proceeds from disposition of discontinued operations		2,643			-		2,643			-
Financing activities		-			-		-			-
Cash from discontinued operations	$	2,369		$	509	$	2,327		$	633

RELATED PARTY TRANSACTIONS

During the quarter ended June 30, 2006, the following related party transactions occurred:

•

The Company repaid $22,000 in advances from related parties.

•

The Company accrued $2,000 in interest payable relating to amounts due to related parties.

•

The Company paid $1,000 in interest relating to the secured subordinated notes to related parties.

•

The Company accrued $25,000 in advisory fees to a related party in connection with the sale of ADB Systemer.

During the six months ended June 30, 2006, the following related party transactions occurred:

•

The Company issued $105,000 of Series J notes to three directors and/or officers, of which, $45,000 was for the settlement of advances from related parties.

•

The Company repaid $22,000 in advances from related parties.

•

The Company accrued $4,000 in interest payable relating to amounts due to related parties.

•

The Company paid $2,000 in interest relating to the secured subordinated notes to related parties.

•

The Company accrued $25,000 in advisory fees to a related party in connection with the sale of ADB Systemer.

LIQUIDITY AND CAPITAL RESOURCES

The Company has been funded to date primarily through a series of private placements of equity and convertible debentures, sales of equity to and investments from strategic partners, gains from investments and option exercises. Since inception, the Company has received aggregate net proceeds of $90.1 million from debt and equity financing and has realized net proceeds of $26.4 million from investment disposals. The Company has not earned profits to date and, at June 30, 2006, has an accumulated deficit of $107.8 million. The Company expects to incur losses further into 2006 and there can be no assurance that it will ever achieve profitability. Operating results have varied on a quarterly basis in the past and may fluctuate significantly in the future as a result of a variety of factors, many of which are outside of the Company’s control.

The Company has incurred negative annual cash flows from operations since inception and expects to continue to expend substantial funds to continue to develop technology, build an infrastructure to support business development efforts and expand other areas of business including the acquisition of, or strategic investments in, complementary products, businesses or technologies. The Company has historically relied on non-operational sources of financing to fund its operations. The Company’s ability to continue as a going concern is dependent on management’s ability to successfully execute its business plan. Management's 2006 business plan anticipates a significant increase in revenue and operating cash flow, particularly from North American business currently under development, but there is no assurance that these objectives will be met.

MANAGEMENT’S DISCUSSION AND ANALYSIS

Dated: August 10, 2006

Current assets of $2.37 million were exceeded by current liabilities (excluding deferred revenue) of $3.08 million at the end of the second quarter of 2006 by $704,000. Current assets of $2.39 million were exceeded by current liabilities (excluding deferred revenue) of $2.55 million by $167,000 at the end of the first quarter of 2006. Deferred revenue has been excluded from current liabilities as it is expected to be settled by resources other than cash.

Cash and cash equivalents increased by $1.17 million to $2.04 million as at June 30, 2006 from $863,000 as at March 31, 2006. This increase in cash and cash equivalents was the result of the activities described in the Results of Continuing Operations section above.

CONTRACTUAL OBLIGATIONS

As at June 30, 2006, the Company's contractual obligations, including payments due by periods over the next five fiscal years, are as follows:

(In thousands of Canadian dollars)	Total		Remainder of 2006		2007		2008		2009		2010		2011 and thereafter
Operating leases	$	555	$	89	$	178	$	160	$	128	$	-	$	-
License agreements		308		56		112		112		28		-		-
Secured subordinated notes - principal repayment ^(a)		2,950		375		1,820		-		-		300		455
Secured subordinated notes - interest payment ^(a),(b)		1,041		39		670		-		-		132		200
	$	4,854	$	559	$	2,780	$	272	$	156	$	432	$	655

(a)

These amounts assume that the notes will be held to maturity.

(b)

Assumes first year of Series I and J interest payable, can be fully settled by the issuance of shares.

CRITICAL ACCOUNTING ESTIMATES

While the accompanying unaudited interim consolidated financial statements have been prepared on the basis of accounting principles applicable to a going concern, certain adverse conditions and events cast substantial doubt upon the validity of this assumption. The Company has not yet realized profitable operations and has relied on non-operational sources of financing to fund operations. The Company’s ability to continue as a going concern is dependent on management’s ability to successfully execute its business plan. Management's 2006 business plan anticipates a significant increase in revenue and operating cash flow, particularly from North American business currently under development, but there is no assurance that these objectives will be met.

MANAGEMENT’S DISCUSSION AND ANALYSIS

Dated: August 10, 2006

CRITICAL ACCOUNTING POLICIES

We periodically review our financial reporting and disclosure practices and accounting policies to ensure that they provide accurate and transparent information relative to the current economic and business environment. As part of this process, we have reviewed our selection, application and communication of critical accounting policies and financial disclosures. We have determined that the critical accounting policies related to our core ongoing business activities are primarily those that relate to revenue recognition. Other important accounting policies are described in Note 3 to our audited annual consolidated financial statements for the year ended December 31, 2005.

REVENUE RECOGNITION

The Company’s revenues are derived from software license fees, implementation, training and consulting services, product maintenance and customer support, and software development, and hosting fees. Fees for services are billed separately from licenses of the Company’s product. The Company recognizes revenue in accordance with Canadian GAAP, which in the Company’s circumstances, are not materially different from the amounts that would be determined under provisions of the American Institute of Certified Public Accountants Statements of Position (SOP) No. 97-2, “Software Revenue Recognition”, and as amended by Statement of Position 98-9, “Modification of SOP 97-2, Software Revenue Recognition, With Respect to Certain Transactions”. The Company also considers the provisions of CICA EIC 141, which is analogous to Staff Accounting Bulletin (SAB) 104, “Revenue Recognition in Financial Statements”, and CICA EIC 142, which is analogous to the Emerging Issues Task Force consensus on EITF 00-21, “Accounting for Revenue Arrangements with Multiple Elements,” in determining the appropriate revenue recognition methodology.

Software License Revenue

The Company recognizes software license revenue in accordance with the terms of the license agreement and when the following criteria as set out in SOP No. 97-2 are met:

• persuasive evidence of an arrangement exists;

• delivery has occurred;

• the fee is fixed or determinable; and

• collectibility is probable.

Software license revenue consists of fixed license fee agreements involving perpetual licenses.

Software license agreements may be part of multiple element arrangements that include consulting and implementation services. When these services are considered essential to the functionality of the license, the associated revenue is recognized on the basis of the percentage of completion method as specified by contract accounting principles. When these services are not considered essential to the functionality of the license, the entire arrangement fee is allocated to each element in the arrangement based on the respective vendor specific objective evidence (“VSOE”) of the fair value of each element. VSOE used in determining the fair value of license revenues is based on the price charged by the Company when the same element is sold in similar quantities to a customer of a similar size and nature. VSOE used in determining fair value for installation, implementation and training based on the standard daily rates for the type of service being provided multiplied by the estimated time to complete each task. VSOE used in determining the fair value of maintenance and support is based on the annual renewal rates. The revenue allocable to the software license is recognized when the revenue criteria are met. The revenue allocable to the consulting services is recognized as the services are performed.

Service Revenue

Service revenue consists of the following types of revenues:

MANAGEMENT’S DISCUSSION AND ANALYSIS

Dated: August 10, 2006

Implementation, Training & Consulting Service Fees

The Company receives revenue from implementation of its product offerings, consulting services and training services. Customers are charged a fee based on time and expenses. Revenue from implementation, consulting service and training fees is recognized as the services are performed or deferred until contractually defined milestones are achieved or until customer acceptance has occurred, as the case may be, for such contracts.

Product Maintenance & Customer Support Fees

The Company receives revenue from maintaining its products and the provision of on-going support services to customers. The maintenance and support fees are typically equal to a specified percentage of the customers’ license fee. If associated with the fixed fee license model, the maintenance revenues received are recorded as deferred revenue and recognized on a straight-line basis over the contract period.

Services revenue from maintenance and support is recognized when the services are performed. Maintenance and support revenues paid in advance are non-refundable and are recognized on a straight-line basis over the term of the agreement, which typically is 12 months.

Software Development Fees

Typically, development of software for our customers is provided based on a predetermined fixed rate basis. Revenue is recognized as time is incurred throughout the development process.

Hosting Fees

The Company earns revenue from the hosting of customer websites. Under our existing hosting contracts, we charge customers a recurring periodic flat fee. The fees are recognized as the hosting services are provided.

CORPORATE DIRECTORY

Directors

T. Christopher Bulger ^{(1),
(2), (3)}

CEO, Megawheels

Duncan Copeland ^{(1),
(2), (3)}

President, Copeland and Company

David Gelineau ^{(2),
(3)}

Account Executive, Donna Cona

Jeffrey Lymburner

CEO

Jim Moskos

President, Northcore Technologies Group

Rick Robertson ⁽¹⁾

Associate Professor of Business

Richard Ivey School of Business,

The University of Western Ontario

Officers

Jeffrey Lymburner

Chief Executive Officer

Jim Moskos

President, Northcore Technologies Group

(1) Member of the Audit Committee

(2) Member of the Management Resources and

Compensation Committee

(3) Member of the Corporate Governance Committee

Northcore Technologies Offices

North America

Corporate Headquarters

ADB Systems International Ltd.

302 The East Mall, Suite 300

Toronto, Ontario M9B 6C7

1 888 287 7467

ADB Systems Limited

3000 Cathedral Hill

Guildford, Surrey GU2 7YB UK

+ 44 (0) 1483 243 577

Additional Shareholder

Information

www.northcore.com

investor-relations@northcore.com

Registrar and Transfer Agent

Equity Transfer Services

120 Adelaide Street West

Suite 420, Toronto, ON M5W 4C3

Auditors

KPMG LLP

Toronto, Ontario, Canada

Lawyers

Gowling Lafleur Henderson LLP, Toronto

Stock Exchange Listings

Toronto Stock Exchange

Symbol: NTI

OTC Bulletin Board

Symbol: NTLNF

Shares Outstanding

Issued: 82,544,690

June 30, 2006

Exhibit
Number		Description

1		News Release Dated August 14, 2006 - NORTHCORE Reports Q2 Financial Results
2		Second Quarter Financial Data
3		Second Quarter 2006 Report
4		Certifications of Interim Filings

	NORTHCORE TECHNOLOGIES INC.



Date: August 14, 2006	By:	/s/ Jeffrey Lymburner
		Name: Jeffrey Lymburner
		Title: Chief Executive Officer

Northcore Technologies Inc.
Consolidated Balance Sheets
(expressed in thousands of dollars)
(Canadian GAAP, Unaudited)


	June 30			June 30			December 31
	2006			2006			2005
	(unaudited)			(unaudited)			(audited)
	(in $C)			(in $US)			(in $C)

				1.1150
				translated
				into $US at
				Cdn$ 1.1150
				for
				convenience
Cash	$	2,035		$	1,825		$	60
Restricted Cash	$	-		$	-		$	-
Marketable securities		13			12			13
Other current assets		324			290			399
Other assets		108			97			201
Assets from discontinued operations		-			-			1,170
Total assets	$	2,480		$	2,224		$	1,843

Accounts payable and accrued liabilities	$	1,220		$	1,094		$	1,285
Due to related parties		70			63			137
Deferred revenue		197			177			91
Current portion of secured subordintated notes		1,786			1,602			343
Current assets from discontinued operations		-			-			894
Non-current portion of secured subordintated notes		391			351			1,800
Minority interest		-			-			3
Total shareholders' deficiency		(1,184	)		(1,063	)		(2,710	)
Total liabilities and shareholders' equity (deficiency)	$	2,480		$	2,224		$	1,843

CONSOLIDATED BALANCE SHEETS *(in thousands of Canadian dollars) (Unaudited)*
	June 30			December 31
	2006			2005
	(Restated - note 3)
ASSETS

CURRENT
Cash	$	2,035		$	60
Marketable securities		13			13
Accounts receivable		248			284
Deposits and prepaid expenses		76			115
Current assets from discontinued operations (Note 3)		-			1,114
		2,372			1,586

CAPITAL ASSETS (Note 4)		38			45
DEFERRED CHARGES		70			156
LONG TERM ASSETS FROM DISCONTINUED OPERATIONS (Note 3)		-			56
	$	2,480		$	1,843

LIABILITIES

CURRENT
Accounts payable	$	608		$	667
Accrued liabilities		612			618
Due to related parties (Note 5)		70			137
Deferred revenue		197			91
Current portion of secured subordinated notes (Note 6)		1,786			343
Current liabilities from discontinued operations (Note 3)		-			894
		3,273			2,750

SECURED SUBORDINATED NOTES (Note 6)		391			1,800
		3,664			4,550
NON-CONTROLLING INTEREST		-			3
SHAREHOLDERS’ DEFICIENCY

Share capital (Note 7)		101,713			100,859
Contributed surplus (Note 8)		1,583			1,555
Warrants (Note 9)		601			278
Stock options (Note 10)		1,187			1,091
Other options		212			271
Conversion feature on secured subordinated notes (Note 6)		1,324			1,513
Cumulative translation account		-			90
Deficit		(107,804	)		(108,367	)
		(1,184	)		(2,710	)
	$	2,480		$	1,843

CONSOLIDATED STATEMENTS OF DEFICIT (*in thousands of Canadian dollars) (Unaudited*)
	Six Months Ended
	June 30			June 30
	2006			2005
DEFICIT, BEGINNING OF PERIOD	$	(108,367	)	$	(104,866	)
NET INCOME (LOSS) FOR THE PERIOD		563			(1,916	)
DEFICIT, END OF PERIOD	$	(107,804	)	$	(106,782	)

	Three Months Ended									Six Months Ended
	June 30									June 30
	2006			2006			2005			2006			2006			2005
	($C)			($US)			($C)			($C)			($US)			($C)

				translated									translated
				into US$ at									into US$ at
				Cdn$ 1.1150									Cdn$ 1.1150
				for									for
				convenience									convenience
Revenue	$	170		$	152		$	244		$	541		$	485		$	514

Operating expenses
General and administrative		498			447			841			940			844			1,548
Customer service and technology		159			143			200			325			291			414
Sales and marketing costs		120			108			127			256			230			257
Employee stock options		37			33			16			72			65			32
Depreciation and amortization		20			18			23			45			40			44
Other income		-			-			(2	)		-			-			(44	)
Total operating expenses		834			749			1,205			1,638			1,471			2,251

Loss from operations		(664	)		(597	)		(961	)		(1,097	)		(986	)		(1,737	)

Interest expense
Cash interest expense		93			83			70			200			179			141
Accretion of secured subordinated notes		123			110			91			268			240			186
Interest income		(5	)		(4	)		-			(5	)		(4	)		-
		211			189			161			463			415			327

Loss from continuing operations	$	(875	)	$	(786	)	$	(1,122	)	$	(1,560	)	$	(1,401	)	$	(2,064	)
Income from discontinued operations		1,918			1,720			(58	)		2,123			1,904			148
Net income (loss) for the period		1,043			934			(1,180	)		563			503			(1,916	)

Earnings (loss) per share:
From continuing operations, basic and diluted	$	(0.01	)	$	(0.01	)	$	(0.02	)	$	(0.02	)	$	(0.02	)	$	(0.03	)
Net earnings (loss) per share, basic and diluted	$	0.01		$	0.01		$	(0.02	)	$	0.01		$	0.01		$	(0.03	)

Weighted average common shares		79,212			79,212			72,683			76,724			76,724			71,782

CONSOLIDATED STATEMENTS OF OPERATIONS *(in thousands of Canadian dollars, except per share amounts) (Unaudited)*
	Three Months Ended June 30						Six Months Ended June 30
	2006			2005			2006			2005
	(Restated - note 3)						(Restated - note 3)
License revenue	$	-		$	-		$	10		$	57
Service revenue		170			244			531			457
Total revenue		170			244			541			514

Operating expenses:
General and administrative		498			841			940			1,548
Customer service and technology		159			200			325			414
Sales and marketing		120			127			256			257
Employee stock options		37			16			72			32
Depreciation and amortization		20			23			45			44
Other income (Note 11)		-			-			-			(42	)
Gains on disposal of capital assets		-			(2	)		-			(2	)
Total operating expenses		834			1,205			1,638			2,251
Loss from continuing operations before the under-noted		(664	)		(961	)		(1,097	)		(1,737	)

Interest expense:
Cash interest expense		93			70			200			141
Accretion of secured subordinated notes		123			91			268			186
Interest income		(5	)		-			(5	)		-
		211			161			463			327

Loss from continuing operations		(875	)		(1,122	)		(1,560	)		(2,064	)
Income (loss) from discontinued operations (Note 3)		1,918			(58	)		2,123			148
NET INCOME (LOSS) FOR THE PERIOD	$	1,043		$	(1,180	)	$	563		$	(1,916	)
EARNINGS (LOSS) PER SHARE:
From continuing operations, basic and diluted	$	(0.01	)	$	(0.02	)	$	(0.02	)	$	(0.03	)
Net earnings (loss) per share, basic and diluted	$	0.01		$	(0.02	)	$	0.01		$	(0.03	)
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING, BASIC AND DILUTED (000’s)		79,212			72,683			76,724			71,782

CONSOLIDATED STATEMENTS OF CASH FLOWS *(in thousands of Canadian Dollars) (Unaudited)*
	Three Months Ended June 30						Six Months Ended June 30
	2006			2005			2006			2005
				(Restated - note 3)						(Restated - note 3)
NET INFLOW (OUTFLOW) OF CASH RELATED TO THE FOLLOWING ACTIVITIES

OPERATING
Loss from continuing operations	$	(875	)	$	(1,122	)	$	(1,560	)	$	(2,064	)
Items not affecting cash:
Depreciation and amortization		20			23			45			44
Employee stock options		37			16			72			32
Accretion of secured subordinated notes		123			91			268			186
Gains on disposal of capital assets		-			(2	)		-			(2	)
		(695	)		(994	)		(1,175	)		(1,804	)
Changes in non-cash operating working capital (Note 13)		192			121			205			391
		(503	)		(873	)		(970	)		(1,413	)
INVESTING
Capital assets		(5	)		(18	)		(5	)		(36	)
Proceeds from disposal of capital assets		-			2			-			2
		(5	)		(16	)		(5	)		(34	)
FINANCING
Repayment of advances from related parties (Note 5)		(22	)		-			(22	)		-
Secured subordinated notes, net (Note 6)		(60	)		-			645			-
Issuance of common shares		-			-			-			570
		(82	)		-			623			570
CASH FLOWS FROM DISCONTINUED OPERATIONS (Note 3)
Operating activities		(274	)		509			(316	)		633
Investing activities - Proceeds from disposition of discontinued operations		2,643			-			2,643			-
		2,369			509			2,327			633

NET CASH INFLOW (OUTFLOW) DURING THE PERIOD		1,779			(380	)		1,975			(244	)
CASH, BEGINNING OF PERIOD		256			378			60			242
CASH (DEFICIENCY), END OF PERIOD	$	2,035		$	(2	)	$	2,035		$	(2	)

SUPPLEMENTAL DISCLOSURE OF CASH PAYMENTS
Interest paid	$	10		$	17		$	20		$	28